SUBJECT: PRINCIPLES OF
BUSINESS
Topic: Contracts
OBJECTIVES
Students should be able to;
• Define the term contract
• Distinguish between a contract and an agreement
• Describe the characteristics of a contract
CONTRACT
• Contract: is a legally binding (enforceable by law) agreement made between two or more
persons, intended to create a legal obligation between them and to be legally enforceable.
• NB: All contracts are agreements but not all agreements are contracts.
• An agreement; occurs when there has been an exchange of promises between two or
more parties. This means that an individual makes a promise (an offer) to another and the
other party accepts the promise. Once an offer and acceptance of the offer exists, an
agreement is reached.
Types of contracts
• Simple contract
• Specialty contract
CHARACTERISTICS OF A SIMPLE VALID CONTRACT
• Agreement; i.e. Offer and acceptance;
• Offer: a proposal; which must be communicated; could be specific or general.
Invitation to treat: a request to a person to enter into negotiation with a view to making an
offer, the acceptance of which would form a binding contract.
• Acceptance: where the offer must be accepted.
• Form or consideration: something of value must be exchanged between the parties
concerned. It could be: money, goods, a promise or service.
• Contractual capacity /Being competent: you must be eligible to enter into contract.
People without contractual capacity include minors and mentally incapable.
• Legality: activities/agreement of contract must abide by the law i.e. must be legal.
• Voluntary: must enter into contract by one’s own freewill i.e. they must not be coerced.
• Possibility: agreement made must be within one’s capacity i.e. it is possible to carry out the
task.
SPECIALTY CONTRACT:
• Specialty Contract: is one that takes a special form. It must be signed, sealed, stamped
and delivered. E.g. sale of land, insurance, sale of goods, hire purchase, mortgage.
Differences between a simple contract & a specialty contract
Specialty Simple
1. Must take a special form 1. Takes no special form
1. Must be in writing 2. could be written, oral or implied
1. Must be signed, stamped, sealed and 3. Does not have to be signed, stamped, sealed
delivered and delivered.
• Mortgage: involves the transfer of property as security for debts.
• Foreclosure: is a court order which bars or prevents the right of redeeming mortgaged property.
Ways of terminating/discharging a contract
• At a definite time stated
• By performance, i.e. when both parties have performed/accomplished their tasks as required within
the contract.
• Mutual agreement by both parties
• Impossibility of performance i.e. death, law-duty becomes illegal, exact subject matter has been
destroyed.
• Contrary to the law i.e. the agreement
• Bribery or corrupt practices were involved after the contract was signed.
• Insanity
• By the court if a dispute arises
• If a minor is involved
• Breach of contract: comes about when there is total failure to do or refuse to do as agreed or when
the duty is performed but not according to the terms of the contract by one (1) of the parties.
• N.B. Contracts that are not valid are either void or voidable.
• Voidable contract: means because of a defect one (1) of the parties may at his option
declare the contract at an end.
• Defects may be:
• Misrepresentation i.e. giving untrue information
• Duress: being threatened or forced
• Undue influence
• Mistake as to the identity of the party
• Void contract: is where the parties entered are mistaken as to the identity of the subject
matter or the existence of the subject matter.
